The Advantages of HSAs

September 18, 2017
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Health Savings Accounts offer you tax breaks & more.

As health care planning remains a topic, why do people open up Health Savings Accounts in conjunction with high-deductible health insurance plans? Well, here are some of the compelling reasons why some employees decide to have HSA’s.

#1: Tax-deductible contributions. These accounts are funded with pre-tax income – that is, you receive a current-year tax deduction for the amount of money you put into the plan. Your annual contribution limit to an HSA depends on your age and the type of high-deductible health plan (HDHP) you have in conjunction with the account.

#2: Tax-free growth. In addition to the perk of being able to deduct HSA contributions from gross income, the interest on an HSA grows untaxed. (It is often possible to invest HSA assets.)

#3: Tax-free withdrawals (as long as they pay for health care costs). Under federal tax law, distributions from HSAs are tax-free as long as they are used to pay qualified medical expenses.

Add it up: an HSA lets you avoid taxes as you pay for health care. Additionally, these accounts have other merits.

  • You own your HSA. If you leave the company you work for, your HSA goes with you – your dollars aren’t lost.
  • Do HAS’s have underpublicized societal benefits? Since HSA’s impel people to spend their own dollars on health care, the theory goes that they spur their owners toward staying healthy and getting the best medical care for their money.

The HSA is sometimes called the “stealth IRA.” If points 1-3 mentioned above aren’t wonderful enough, consider this: after age 65, you may use distributions out of your HSA for any purpose; although, you will pay regular income tax on distributions that aren’t used to fund medical expenses. (If you use funds from your HSA for non-medical expenses before age 65, the federal government will typically issue a 20% withdrawal penalty in addition to income tax on the withdrawn amount.)  In fact, you can even transfer money from an IRA into an HSA – but you can only do this once, and the amount rolled over applies to your annual IRA contribution limit. (You can’t roll over HSA funds into an IRA.)

How about the downside? In the worst-case scenario, you get sick while you’re enrolled in an HDHP and lack sufficient funds to pay medical expenses. It is worth remembering that HSA funds don’t always pay for some forms of health care, such as non-prescription drugs. You also can’t use HSA funds to pay for health insurance coverage before age 65, in case you are wondering about such a move. After that age limit, things change: you can use HSA money to pay Medicare Part B premiums and long-term care insurance premiums. If you are already enrolled in Medicare, you can’t open an HSA; Medicare is not a high-deductible health plan.

Even with those caveats, younger and healthier workers see many tax perks and pluses in the HSA. If you have a dependent child covered by an HSA-qualified HDHP, you can use HSA funds to pay his or her medical bills if that child is younger than 19. (This also applies if the dependent child is a full-time student younger than 24 or is permanently and totally disabled.)

Your employer may provide a match for your HSA. If an HSA is a component of an employee benefits program at your workplace, your employer is permitted to make contributions to your account.  With the future of the Affordable Care Act in question, and more and more employers offering HSA’s to their employees, perhaps people will become more knowledgeable about the intriguing features of these accounts and the way they work.

At HFG Wealth Management, we embrace a holistic method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage.  For more information, please visit www.hfgwm.com or call 832.585.0110.

 

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Copyright © 2017. HFG Wealth Management, LLC. Investment advisory services offered through HFG Wealth Management, LLC – An independent Registered Investment Advisory firm registered with the SEC. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Therefore, any information presented here should only be relied upon when coordinated with individual professional advice. [ more disclosures ]